BIR Ruling [DA-620-99]

November 3, 1999 BIR RULING [DA-620-99] Sanidad Abaya Cortez Te Viterbo Enriquez & Tan 2nd F/ Transorient Maritime Bldg., 66 Timog Ave., Quezon City Attention: Mr . Gregorio Tanaka Viterbo, Jr . Gentlemen : This refers to your letter dated January 9, 1999 requesting on behalf of your client, Credit Agricole Indosuez, an off-shore commercial bank, for confirmation of your opinion to the effect that the separation benefits to be received by its employees by reason of retrenchment are exempt from income tax pursuant to Section 32(B)(6)(b) of the Tax Code of 1997. It is represented that in October 1998, your client decided to scale down its commercial banking department in the light of recent financial reverses that have resulted in significantly diminished banking activities; that the scale down resulted in the retrenchment of seventeen (17) of its employees; and that the decision to scale down its activities came solely from your client. In reply, please be informed that pursuant to Section 32(B)(6)(b) of the Tax Code of 1997, any amount received by an official or employee or by his heirs from the employer as a consequence of separation of such official or employee from the service of the employer because of death, sickness or other physical disability or for any cause beyond the control of the said official or employee is exempt from taxes regardless of age or length of service. The phrase "for any cause beyond the control of said official or employee" connotes involuntariness on the part of the official or employee. The separation from the service of the official or employee must not be asked for or initiated by him. The above-mentioned law requires the presence of two (2) conditions in order that the employee benefits may be granted tax exemption, namely (1) the employee is separated from the service of the employer due to death, sickness, or other physical disability or for any cause beyond the control of said official or employee; and (2) the employer pays benefits to the official or employee or his heirs as a consequence of such separation. Since the separation of the above-mentioned employees is due to retrenchment, and, therefore, beyond their control, any and all amounts to be received by them as a result thereof, are exempt from income tax and consequently from the withholding tax as prescribes by Section 79, Chapter XIII, Title II of the Tax Code of 1997, as implemented by Revenue Regulations No. 2-98. The payment of the separated employees' salaries, however, is subject to income tax and consequently to the withholding tax. (BIR Ruling No. SB-005-99 dated February 5, 1999) This ruling is being issued on the basis of the foregoing facts as represented. However, if upon investigation, it will be disclosed that the facts are different, then this ruling shall be considered null and void. Very truly yours, Commissioner of Internal Revenue By: (SGD.) SIXTO S. ESQUIVIAS IV Deputy Commissioner Legal and Enforcement Group